Commercial Litigation and Dispute Resolution Blog

Restrictive covenants are commonly used for a wide variety of reasons.  They can ensure access across property or be part of a wider community plan.  They can define the use land can be put to or protect it for a singular purpose.   They are intended to be a commitment that runs with the land rather than just an obligation or benefit for the current owners.  There is no standard form of covenant for the very reason that they are generally drafted for particular reasons with specific properties in mind.  In each case, the covenant must be clear as to its scope and purpose and be capable of application into the future whoever the land owners are and whatever changes take place in the nature of the surrounding area.  As a result, while it may be easy to envision what a covenant is intended to do, it can be quite another thing to properly articulate it in a written document.

The risk of not properly drafting a covenant is that it will, at some future date, be challenged by someone who does not like it and risk being found invalid by the courts.  A recent Court of Appeal decision illustrates this very outcome.  A developer with a vision built a hotel strata on the shores of Lake Okanagan.  The idea was simple.  Units could be purchased as either primary residences or holiday spots for families.  The hotel would provide services such as housekeeping, maintenance, food and beverages and a front desk.  Units that were not occupied full time were to be put into a rental pool operated by the management company that provided the services.  Units would be rented to the public and the revenue shared between the strata unit owner and the operator.

In order to make the plan work, each strata unit was encumbered by a covenant that provided rentals to the public must be done in accordance with a rental pool management agreement administered by the rental manager.  This ensured revenue for the maintenance of the strata and a cohesive hotel operation run by the management company.  Units rented outside this arrangement would get the benefits of a hotel without contributing to the cost of its operation.  The covenant was intended to avoid this unfairness.  Seems simple.

However, the covenant came under attack by one strata owner who, having moved out, wanted to rent his unit free from the obligations imposed by the rental pool agreement.  The hotel managers sued him seeking an injunction compelling the rental of his unit through their office in accordance with the rental pool management agreement.  The owner counterclaimed seeking an order under the Property Law Act that the covenant was unenforceable on the grounds of uncertainty.  The trial judge, no doubt mindful of the chaos to the hotel operation if the covenant was struck down, found it to be sufficiently clear as to be enforceable.  The Court of Appeal disagreed.

The problem really centered on the fact that the covenant did not contain a complete description of the rental pool agreement.  In short, while it was a detailed document, it only referred indirectly to the “Rental Pool Management Agreement” as the agreement made between the owner and the hotel manager setting out its terms and as may be amended from time to time.   What this meant is that no owner could, by looking at the covenant alone, know with any certainty what obligations they had under the Rental Pool Management Agreement.  To find out, they had to look outside the covenant itself.  Further, the Rental Pool Management Agreement had not existed when the covenants were originally registered and, after it was created, had changed a number of times over the years.  The rental pool agreement also gave the hotel operator the ability to change terms (such as the profit share) without an owner’s agreement.

The Court of Appeal did not like this because it meant there was no real certainty to the terms of the covenant.  What the covenant meant was dependent entirely on an external document that was effectively only an “agreement to agree”.  It was whatever the hotel operator and owner may ultimately agree to.  Such “agreements” are legally unenforceable.   The covenant did not contain a mechanism to resolve cases where no agreement was reached.  The law requires that covenants be absolutely clear so that “present and future owners may know with precision what obligations are imposed upon them.”  As the covenant in this case did not meet that standard, it was held unenforceable and struck from the title to the owner’s unit.

While the decision illustrates the clear line courts seek to draw on the requirements needed to make sure a covenant is enforceable, it also throws into peril the operation of this hotel as a practical matter.  If you seek to have a covenant be enforceable now and into the future, you would do well to make sure it is drafted carefully.  If you are burdened with a covenant you don’t particularly like, there may be hope for its cancellation if you can demonstrate it is not entirely clear in its expression.  It may be worth challenging in court.  The only downside, besides time and cost, is that you may be wrong: it is enforceable.  In that case, you are really no worse off.